White Picket Fence Banking
I have spent the last month attempting to wrap my head around two massively contradictory numbers:
- The average underbanked person in the United States spends more than $1000 a year on financial services.
- The percentage of underbanked people in the United States has increased by as much as 11% in recent years — and now more than 51 million Americans are underbanked.
How can this be possible? How is a potentially lucrative market becoming less of a priority for banks and mainstream financial services companies?
To start, large banks claim that new regulations are making it impossible to serve those customers profitably.
At first glance this hardly seems possible. Even generous numbers published by industry lobbyists claim that it costs $250/year, per user to deliver full account services, a tiny fraction of what consumers are spending on a basket of similar services. The root cause, then, lies elsewhere — in a remarkable disconnect between what major banks are selling to consumers, and what consumers are actually asking for.
One would assume that people at the fringes of the financial system, spending over $1000 a year for services, would be clamoring for more affordable basic access. This simply isn’t the case. In fact, 26% of the underbanked say they don’t want bank accounts at all.
In many ways, banks are selling the White Picket Fence model of banking. It’s a world where every family has a single earner, working a single, salaried job, with a checking account, a savings account, and an employer matched 401(k). This bias is borne out in their business model — still reliant on depositors holding reasonably large and consistent sums at the bank, or at least being future customers of expensive mortgages and retirement planning. Their reason for focusing on those consumers is quite rational: they are the most stable, the most lucrative, and the easiest to reach and sell to. The bottom of the market is smaller, more fragmented, and requires a complete rethinking of a deeply entrenched business model. It would be fair to say that banks are facing a classic innovator’s dilemma.
This entrenched model is vastly out of touch with the changing ways that America lives and works. Single parent households have tripled since 1960. 23% of households are headed by a part-time employee. Nearly half of all households don’t have enough saved to live for three months at the poverty line. Most crucially, 20% of households qualify as underbanked, meaning they have at best a checking account or prepaid debit card.
So where are the underbanked spending their $1000 a year on financial services? It ends up being the death by a thousand cuts of a broken system — an overdraft here, a payday loan there, piled on with check cashing fees and money orders to pay bills.
Some very smart people have attempted to tackle this disconnect, but in doing so, they’re often simply applying a veneer to the existing system. Simple gave us a pretty interface and minimal fees, but in the end it was still just a checking account managed via mobile. Online lenders put a friendly face on payday loans, but don’t seek to address the underlying behavior that causes people to seek short term, high interest rate loans in the first place. Of course, one would be remiss not to mention the money pouring into Bitcoin financial services startups, which so far seem focused on tackling parts of the system that aren’t really all that broken, like e-commerce payments.
The confluence of massive demographic changes and a new set of technical tools for building financial services means there’s an opportunity to truly reinvent the market. Marc Andreessen refers to this as “unbundling the banks.” What’s fortunate for startups is that regulators are just as focused on the White Picket Fence as big banks are — leaving room for innovation at the edge of the network, and in the margins between existing regulations.
My bet is that the next generation of financial services companies won’t simply apply new layers onto existing services, or digitize backwards parts of the industry. Instead, we’ll see companies that fundamentally change our relationship to how we earn, how we save, and how we borrow. They will start in markets that are small, fragmented, or too low-margin to interest the traditional market leaders. But that’s ok — we’ve seen this story before.
